Tags: Pimco | Threat | Sovereign | Debt | Crisis

Pimco: Threat of Sovereign Debt Crisis Underestimated

Thursday, 18 Mar 2010 03:25 PM

By Dan Weil

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Governments, investors and economists don’t realize the full extent of the havoc that the sovereign debt crisis can wreak around the world, says Pimco CEO Mohamed El-Erian.

“Our sense is that the importance of the shock to public finances in advanced economies is not yet sufficiently appreciated and understood,” he says.

“Yet, with time, it will prove to be highly consequential. The sooner this is recognized, the greater the probability of being able to stay ahead of the disruptions rather than be hurt by them,” he recently wrote in the Financial Times.

For now, experts are focusing narrowly on Greece, El-Erian explains.

“Down the road, it will be recognized for what it is: a significant regime shift in advanced economies with consequential and long-lasting effects.”

To help deal with the crisis, everyone must keep in mind several points, he says.

• This is just the latest disruption to balance sheets.

• The crisis blurs the distinction between developed and emerging economies.

• Adjustment will come. The question is how orderly it will be.

• The global dimensions of the crisis complicate each country’s response.

• Expect slow reaction from the public and private sectors.

Former Federal Reserve Chairman Alan Greenspan says the turmoil may soon spread to the United States, thanks to our exploding budget deficit and debt burden.

"History tells us that great powers when they've gotten into very significant fiscal problems have ceased to be great powers," he told NBC.

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